A Walk on the Dark Side

1/18/08Follow @vinit44

I have been part of the entrepreneurial ecosystem for over 25 years, mostly as an entrepreneur but also as a VC and angel investor. I firmly believe that the symbiotic relationship of entrepreneurs and smart capital is the key to economic development around the world.

I have spent the past six years either running VC-backed startup companies or as an investor at Key Venture Partners. Here are some of my observations from my time on the Dark Side:

* If one rates what it takes to be a successful VC partner, sourcing deals is usually the number one task. Therefore it is surprising how many VCs are slow to respond to phone calls and emails from entrepreneurs, even when referrals come from trusted sources.

* The VC business requires long term thinking but very few VC partners are willing to invest in relationships with entrepreneurs that may not bear fruit for years. I believe that those VCs that develop long term relationships, tend to outperform those that don’t.

* Being a VC is learning how to drink from a fire hose. In the two years I was a VC I sourced 220 deals and invested in one company. That doesn’t count all the other deals that we discussed in partners’ meetings. One has to develop judgment on a deal very quickly even if it means that you may decline what turns out to be a good deal.

* My philosophy in dealing with entrepreneurs was that I always gave something back to them for the time they spent with me. Even if I declined to invest I would give them a VC or customer lead, or some advice about their business. In my view, this created the foundation for a longer term relationship. Many VCs have lost sight that they are service providers to entrepreneurs not the other way round.

* As experienced entrepreneurs know, not all VC partners add value to their portfolio companies. Some can even add friction to the governance process and can be distracting for management. Usually this results from differences in opinion about exit timing but also sometimes from ego issues.

* I thought hard about how we as a firm might add value to our portfolio companies. One area that a CEO is responsible for but always seems to get relegated to lower priority, because day-to-day operations take precedence, is exit planning. At Key Ventures we developed an exit template for all our portfolio companies that included: investment banks with relevant focus, analysts, potential acquirers (and we built a relationship with their VP Business Development), public company valuations, etc.

* It is known that serial entrepreneurs matched with serial VC partners generally leads to successful companies. The problem, in my opinion, is a shortage of serially successful VC partners in the US and especially in Massachusetts. I have joined Boston University’s Institute for Technology Entrepreneurship and Commercialization and will endeavor to address this shortage by researching what makes the good ones so effective and then teach these best practices to aspiring VCs.

* The symbiotic relationship between entrepreneurs and VCs is recognized as the best way to develop an economy. It has been over 60 years since General Doriot and others founded American Research & Development Corp. (in June 1946), the first organised venture capital firm. In 2006 venture-backed companies’ revenue made up 17.6 percent of the GDP and 9.1 percent of private sector employment in the US according to the NVCA. Similarly China and India have accelerated their economic growth rates as a result of unleashed entrepreneurial energy in the past 20 years. The rest of the world is now adopting this model.

* I believe this model needs some tweaking in the US as it gets applied to new innovative industries such as life sciences, energy and nanomaterials.

(Editor’s note: This article also appears, with other interesting information and insights, on Vinit Nijhawan’s own blog.)

Vinit Nijhawan, an entrepreneur, angel investor, and former venture capitalist, is Lecturer and Executive-in-Residence in the Boston University School of Management. Follow @vinit44

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  • http://www.xconomy.com/author/wroush/ Wade Roush

    Mark Modzelewski, in his must-read Boston Herald blog Hub 2.0, has a thoughtful response to Vinit’s column. He takes issue with just about every single point Vinit makes, but in a nice way. He closes: “I agree with Mr. Nijhawan that venture capital can be done more effectively and that start-ups need more help and funding options, however making one work better doesn’t necessarily fix the other.” See http://www.bostonherald.com/blogs/news/hub_20/index.php/2008/01/20/more-on-the-need-for-a-fix-for-venture-capital/

  • Ken Wood

    Wade doesn’t say it, but the article is light and of very little depth.

    Nijhawan needs to do his homework

  • Mike Hunt

    VC’s are only around because of the Entrepreneurs that give them life. I am a real seriel entrepreneur and not a wanna be.

    Venture capital is not a science. It’s not anything to be discussed hardly about. VC’s can’t see into the future. They bet on teams, and do deals with people they can trust. Simple as that.

    The fact that you may have done 1 deal out of 120 other deals or meetings that you took has nothing to do with who you trusted but who could trust you.